Facts
Under a contract dated 14th November 2002, Tyco designed and
constructed a fire protection system for Rolls- Royce's new
manufacturing plant in West Sussex. In July 2003, a mains supply
pipe burst, causing a flood and damaging both Tyco's works and
other parts of the plant.
Tyco repaired the damage to its works. The issue was whether it
was liable to Rolls-Royce for the damage to "existing structures".
For present purposes, it was assumed Tyco's negligence caused the
flood.
Contract terms
The construction contract provided that Tyco would indemnify
Rolls-Royce against damage or loss arising from a breach of
contract, breach of statutory duty or negligence by Tyco ("the
Contractor"), Tyco's sub-contractors or suppliers.
Clause 13 provided that "the Works" would be at Tyco's risk
until practical completion and that Tyco would maintain public
liability cover and (optionally) professional indemnity cover.
Clause 13.5, however, said that Rolls Royce would maintain "in
the joint names of [Rolls Royce], the Construction Manager and
others including, but not limited to contractors, insurance of
existing structures, and in the name of [Rolls-Royce], the
Construction manager and the Contractor and his sub-contractors ...
insurance of the Works …against the risks covered by [Rolls
Royce's] insurance policy referred to in Schedule 2 (i.e. the
Specified Perils)…". The specified perils included burst pipes.
Tyco argued that it was not liable for damage to other parts of
the development: (1) because its contract with Rolls-Royce (in
particular the provision for joint insurance) was intended to
exempt it from liability, and (2) because it is a rule of law that
one joint insured (or co-insured) cannot recover from another joint
insured for the same loss.
The High Court judgment
The judge found in Tyco's favour, basing his decision on another
construction case, Cooperative Retail v Taylor Young, which went to
the House of Lords in 2002.
In that case, a building project was severely damaged by fire
shortly before completion. The contractor was contractually obliged
to (and did) obtain insurance in the joint names of itself and the
employer. The insurers paid up and pursued a subrogation action in
the name of the employer against the architect and engineer.
The architect and engineer started contribution proceedings
against the contractor under the Civil Liability (Contribution Act)
1978, on the grounds that the contractor was liable to the employer
for the same loss.
The contractor argued he had no liability to the employer. The
House of Lords agreed. As a matter of construction, the terms
of the construction contract clearly exempted the contractor from
liability that fell within the scope of the insurance.
Consequently, the House of Lords did not need to decide if there
is a rule of law that prevents one co-insured from pursuing
another. But Lord Hope commented "I would prefer to say that the
true basis of the rule is to be found in the contract between the
parties".
The parties had specifically provided in their contract that
insurance would be taken out in their joint names and other clauses
in the contract made it clear the contractor would not be held
liable to the employer for negligence that caused damage to the
works. In light of this, Lord Hope considered there was an implied
term in the contract that neither party could claim against the
other for damage covered by the policy.
In Tyco, the High Court judge found the contract set up a
similar special liability regime, backed up by insurance, which
effectively exempted Tyco from liability. He did not make any
decision on the question of a general rule of law about
co-insurance. Rolls-Royce appealed.
The Court of Appeal judgment
The Court of Appeal disagreed with the judge. As a matter of
construction, the terms of this contract did not amount to a
special regime exempting Tyco from liability for damage to existing
structures.
That part of clause 13.5 that dealt with the insurance of
existing structures did not refer to Tyco (the "Contractor") at
all. It merely stated that the insurance covering existing
structures comprised a series of joint-name policies which
protected "others", including contractors.
Contractors would know from this that, if disaster struck,
Rolls-Royce would have resources to reinstate its own property and
continue the project. It was not intended to provide Tyco or any
individual contractor with liability cover in respect of the
existing structures.
This made it unnecessary to decide whether it is a rule of law
that one co-insured cannot recover from another co-insured in
respect of losses covered by the policy. Lord Justice Rix, however,
cautiously put forward the view that there is no such rule.
The position depends on the construction of the underlying
contract between the parties. In the Cooperative Retail case, the
parties' intention to create an exemption was clear from their
contract.
Where the intention is not so clear, the fact that the parties
have made express provision for joint names insurance might
influence the court's decision. But this could be overridden by
terms that envisaged one co-insured being liable to another for
negligence that fell within the scope of the insurance
cover.
In such a case (and in the absence of an express removal of
subrogation rights against a co-insured) Lord Justice Rix did not
think there was any general rule of law to prevent one co-insured
(or insurers in the name of one co-insured) suing another.
Commentary
Lord Justice Rix's views on the question of a general rule of
law did not form part of the judgment and his comments were made
with caution.
Nevertheless, the lesson of this case is that any risk
allocation regime in a construction contract needs to be defined as
clearly as possible. Contractors should not assume that, because
the contract provides that the employer will take out insurance in
joint names, they will automatically be immune from subrogated
claims brought in the names of their co-insureds.
If it is intended that liability will be excluded to the extent
the joint names insurance responds to the loss, this must be set
out in clear terms and care taken to ensure that the insurance and
indemnity provisions are consistent with each other. The contract
should also specify how losses other than those covered by the
joint names insurance will be dealt with.
